Raising the Rent
How do I raise the rent on a rental property?
This answer will depend on the terms of the tenancy agreement the landlord has put in place with their tenant. Rental property can be let under a fixed tenancy or a periodic tenancy. Most landlords use a periodic tenancy, so let’s look at that first.
Raising the rent on a fixed tenancy
In the majority of these fixed term tenancies a landlord will opt for a 6 month tenancy although it can be longer. During the period of this fixed term a landlord cannot put up the rent, unless the tenancy agreement makes specific provisions to allow for it. These specific provisions may be by way of an escalator clause for instance, by stating that the rent will go up by inflation after six months. However, these are rare, and the vast majority of landlords avoid such inflexible and prescriptive clauses.
Therefore, a landlord is not able to raise the rent until the end of the fixed term of the tenancy, at which point they are free to review the rent an decide whether to re-let to their tenant.
Raising the rent is a decision that a landlord should consider carefully. My advice is to avoid upsetting tenants, and there is no better way to wind up a tenant than introduce the idea of rise in their rent. The tenant’s mutterings of – “Greedy, bloodsucking landlord,” can be heard down the telephone wire.
At the same time, if a landlord judges that the prevailing rental market conditions strongly support a rise in the rent, then the proposition shouldn’t be discarded. This is business after all, and if the rental market indicates that the rent should be higher, then a rise might be in order.
For instance in places such as central London and parts of the south east, where rental inflation is running well ahead of general inflation, if a landlord was only to raise their rent in line with inflation they would be falling behind the rest of the rental market.
If a landlord decides to opt to re-let to the existing tenant then raising the rent is relatively easy as all they need to do is create a new assured shorthold tenancy agreement with the new agreed increased rental figure included.
Simply put, to increase rent, a landlord needs to issue a new tenancy agreement.
Raising the rent on a periodic tenancy
If the rental property is let under a periodic tenancy things are different. Under these types of tenancies there is no specific end date.
There are two types of periodic tenancy, the contractual periodic tenancy, in which from the outset there is no end date, or the much more common statutory periodic tenancy.
The statutory periodic tenancy comes about when a fixed term tenancy lapses. In the case of periodic tenancies, increasing the rent is slightly more complicated because the landlord will need to go through the formal procedure as set out in section 13 of the Housing Act 1988.
If a landlord wants to increase the rent and intends to keep the tenancy on a statutory periodic tenancy, they can use the special form titled Landlord’s notice proposing a new rent under an Assured Periodic Tenancy or Agricultural Occupancy, sometimes known as a section 13 notice.
These section 13 notices can be created in Property Hawk’s Property Manager and are free to download.
The section 13 notice form allows a landlord to propose a rent increase as soon as the statutory tenancy begins. For a contractual period tenancy a landlord can use the same form to propose an increase which will take effect one year after a tenancy begins.
In both cases a months notice of the increase is required for rents paid on a weekly or monthly basis (more if the rent period is longer). With both periodic tenancies a landlord can propose further rent increases at yearly intervals, after the first increase.
Potential snags with raising rents
There are a number of potential snags for landlords when raising the rent, not least, scaring away perfectly good tenants, who may not like the idea of an increase in their rent or simply can’t afford it.
Unless the landlord is happy to lose these existing tenants, they need to be confident they will be ready to accept a higher rent. Losing a tenant because of a rise in the rent can be costly, both financially and in time. Finding new tenants involve the work and expense of advertising, re-letting and potentially a protracted rental void period. This loss in rent can often out weigh any financial benefits of a rise in the rent.
A potential snag with section 13 rent increases is generally a landlord can only raise rents once a year. In a fast moving market such as the one being experienced in parts of London and the South-East currently, annual rental increases will not necessarily keep pace with market rents.
The other aspect about a landlord with a periodic tenancy who needs to use a section 13 notice is that it entitles a tenant who is not happy with the rental increase to apply to a Rent Assessment Committee
for a determination of what rent a landlord could reasonably expect to pay if he or she was letting it on the open market under a new tenancy on the same terms. The committee has the power to agree the rent or set a rent higher or lower. The rent then fixed by the committee is the legal maximum the landlord can charge. The new rent will be payable from the date specified in the landlord’s notice unless the committee considers this would cause a tenant undue hardship in which case it may specify a later date. The landlord can propose that the rent is increased a year after the date on which the rent decided by the committee was payable.
The Rent Assessment Committee
All this may sound quite daunting to a landlord. The reality is it shouldn’t be. Whilst on the face of it the Rent Assessment Committee seems to have a considerable amount of power, in reality they don’t. For a start they can only set a new rent if it is demonstrably unreasonable. The other factors that limits the scope of the Rent Assessment Committee and the tenant in ultimately setting rental levels is that the landlord retains the right to issue a section 21 notice. This means that providing the fixed term period has come to an end by the time the notice has expired a landlords ultimate response to a rent that is unsatisfactory is to regain possession of their rental property and simply re-let it to another tenant at the rent that they and the market will bare.
Should a landlord raise the rent?
The simple answer is that landlords should normally opt for a fixed term tenancy such as the free tenancy agreement available within Property Hawk’s free property manager software. A landlord should avoid the tenancy lapsing and becoming a periodic tenancy. They can do this by going through the motions of issuing a section 21 notice for possession even at the start of the tenancy to ensure that a landlord can bring the tenancy to an end. In this way a landlord is in the perfect position at the end of the fixed term to either re-let to the existing tenant at a higher rent, or if the tenant objects, to regain possession and then let the property to another tenant at the higher rent.
A word of caution to landlords in less high demand rental areas, tenants can be unsettled by receiving a section 21 notice, therefore a landlord should approach the situation with sensitivity, explain that the notice is a just a formal procedure and that they have no intention of seeing it through.
The key thing landlord should remember, a tenant paying rent, even if it is not the absolute top rate, is always preferable than having no rent paid at all!